Forecasting Quarterly Contributions
Small businesses and contractors are likely familiar with financial budgeting. By using your actual earnings and fiscal information from past years, you can get a good idea of what your expenses will be in the future. Financial forecasting is a little different. Instead of expenses, you are estimating your potential earnings, or even loss of earnings, to get an estimate of what your tax liability will be in the coming year. As a small business owner or independent contractor, you likely have quarterly contributions, so forecasting is important and necessary.
The country’s tax system is a “pay as you go” method. Employees on payroll get help from employers who contribute taxes for them through paycheck withholding. If you work for yourself or own a business, you are responsible for your own quarterly contributions. Payments must be made around the 15th of April, June, September, and the 18th of January each year. Since the dates can change, it’s important to know the exact date as you can be penalized for missing a quarterly contribution.
How will you know how much to pay quarterly? It’s important to project your liability quarterly. Rather than going off of the money you have in the bank currently, you can look at historical performance and profit from quarter to quarter. The IRS provides a sample Schedule C form that you can fill out that will tell you what your tax liability is likely to be for planning purposes. The form considers business expenses, which you can deduct from your yearly income to reduce your tax liability. Once you have your projected tax liability, you can find the average tax for the tax bracket you’ll fall into. An accountant at HD Davis can help you research the federal and state tax brackets and work with you to find an accurate tax liability estimate.
Projecting tax liability quarterly is critical when it comes to saving money for your taxes. Going just off of your estimated budget might end up with you not saving enough. Saving more than you think you will contribute is not a problem. This is similar to a payroll employee contributing more than they need to and receiving a refund at tax time. Any excess funds in your tax savings account will be like a refund for you or your business. An accountant can advise ways to invest or save these excess funds in ways that can help reduce your tax liability for the next year.
Forecasting tax liability can be a confusing and tricky thing to do. If you want your quarterly contributions to be as accurate as possible, contact the professionals at HD Davis CPAs to help you get a good estimate of what your tax burden will be.